Debt mutual funds are a type of mutual funds invested mainly in a mix of fixed income or debt securities like corporate bonds, government securities, treasury bills, money market instruments, besides other debt securities of various time horizons.
Generally, debt securities have fixed maturity date and pay fixed interest rate. The returns come as:
- Interest income
- Capital appreciation or depreciation due to market fluctuations
A wide range of fixed income or debt mutual funds is available to suit various needs of investors based on the ability to bear risk and the investment horizon.
Major benefits of debt mutual funds include:
- As debt mutual funds invest in a range of interest bearing instruments, they are not affected by equity market volatility.
- They relatively add stability to the investment portfolio by reducing the risk associated with the investment portfolio.
- These mutual funds give you the freedom to withdraw money whenever required. However, the investments are subjected to an exit load.
- They allow better post-tax returns as the earnings come in two forms (i) dividend or interest payments (ii) capital gains based on the difference between the debt security’s purchase price and sale price. Tax on the dividend or interest income is called dividend distribution tax (DDT), which is broken into (i) dividend for individual v/s non-individual investors and (ii) dividend from liquid v/s non-liquid funds. Tax on capital gains are broken up and then taxed. A marginal tax rate is charged on the short-term capital gains. An indexed tax rate is charged on the long-term capital gains.
- Debt mutual funds also come with indexation benefit that adjusts the purchase value and the impact of inflation on investments made for above one year.
Before investing in any mutual fund, get clarity on things like the investment objective, investment horizon, and the extent of risk that could be taken. You should also consider factors like the rise of interest rates in a long time and short term. If you are not aware of the market proceedings, seek unbiased professional help to make the right investments that suit your portfolio.
With professional advice, you could first identify and assess all your money goals and risk appetite and then make the investments to reach each financial goal. We at ArthaYantra work with a motto of doing the right thing for our customers. Approach online experts for personal finance advice and fulfill all your money goals of life!